Pay in Lieu of Notice clauses are commonly referred to as PILON clauses. A pay in lieu of notice clause is where the employee is paid their notice monies in one lump sum instead of them working their notice so their employment ends straight away. The right has to be reserved in the contract of employment to avoid a breach of contract claim. For example, if you pay the employee their notice monies in lieu but there was no right in the contract to do this, then the employee's contract will have been breached and all their other contractual obligations, such as restrictive covenants will fall away. You can reserve the right to just pay basic salary and not other contractual benefits for the notice period if you choose to pay in lieu but again this right must be detailed in the contract. There is a common misconception that a pay in lieu of notice clause makes the payment to the employee tax free if it is paid either in one lump sum or under a compromise agreement. This is not the case. A pay in lieu of notice clause in the contract makes the payment in lieu of notice taxable as a clear contractual benefit. If there is no payment in lieu of notice clause in the contract but the Company always pays in lieu of notice then by custom and practice the Inland Revenue deem this as a taxable benefit too. A compromise agreement is one of the few ways an employee can sign away their rights to bring employment claims for example in a restructure/redundancy situation. The other is through ACAS or in or during the course of Tribunal proceedings.
What makes a valid compromise agreement is governed by s203 of the Employment Rights Act 1996. The compromise agreement must be in writing, signed by both parties and the individual must have taken independent legal advice on the compromise agreement so they know what the rights are that they are signing away. The legal adviser must sign a certificate to confirm the independent advice has been given. The compromise agreement itself however must then also comply with a number of other requirements to make it binding, enforceable etc. Each compromise agreement therefore must be drafted to meet the specific circumstances of each case. Using a blanket precedent compromise agreement each time is unlikely to protect the organisation in the event of a claim. Many employers are giving exiting employees compromise agreements to ensure a clean break and certainty that there will be no subsequent claims and with increasing need for businesses to restructure or in a redundancy situation to make their organisations leaner in such difficult economic times, their use is likely to increase. When a compromise agreement is offered is also crucial as the offering of a compromise agreement could be relied upon by an employee as a constructive dismissal. Please do call us at the number below to discuss this or any other employment issues.
Charlotte BabijTel: (01295) 661 439Fax: (01295) 257 580Email: charlottebabij@brethertons.co.uk
